“Two words in the tax code, ‘effective control,’ could decide whether a storage project is eligible for tax credits, and Treasury still hasn’t said what these words mean.”

In the clean energy business, “effective control” has become the buzzword of the year, and it carries real tax-credit consequences. The term comes from the Prohibited Foreign Entity restrictions, often referred to as the Foreign Entity of Concern (FEOC) restrictions, codified in the Internal Revenue Code as a result of the One Big Beautiful Bill Act (OBBBA). This rule can block a taxpayer from claiming clean energy tax credits if a “specified foreign entity” exercises effective control over the project. Specified foreign entities include companies owned or organized in China, Russia, Iran, or North Korea, as well as named companies and sanctioned entities.

These words may not make the Oxford English Dictionary’s Word of the Year, but it matters to the storage business.

Three FEOC tests for tax credit eligibility

The FEOC rules impose three principal restrictions.

The first concerns the taxpayer, called the entity-level rules: whether its ownership, financing or governance arrangements make it a prohibited foreign entity. Importantly, it also includes contractual control: whether agreements with specified foreign entities give those entities “effective control” over a project. That can include unrestricted rights to determine how much energy a system stores or delivers and when, restrict access to critical data, or exclusively maintain, repair or operate essential equipment.

The second concerns the supply chain, called material assistance rules: how much of a project’s equipment and component costs are attributable to prohibited foreign entities. For storage projects beginning construction in 2026, at least 55% of the applicable direct costs of manufactured products and components must be attributable to non-prohibited sources, rising to 75% for projects beginning construction in 2030 or later.

The third concerns recapture. Under the same contractual control test, the issue under certain tax credits is whether the taxpayer later provides “effective control” over a project after it is placed in service to a specified foreign entity.

The meaning of effective control

The FEOC restrictions allow Treasury to issue guidance on the meaning of “effective control” but in the interim defines the term. If a taxpayer pays a specified foreign entity under a contract, agreement, or other arrangement that gives it (or an entity related to the specified foreign entity) effective control, the project is ineligible. The law lists several criteria that equate to “effective control” during the pendency of Treasury guidance. For energy storage, the criteria include an unrestricted right to determine the amount or timing of charging and discharging, to determine who can buy the output, to restrict access to critical data, or to maintain, repair or operate the equipment on an exclusive basis.

Licensing arrangements add more criteria under the definition of “effective control.” These include royalties for more than 10 years or a requirement to hire the licensor for more than two years of service. Importantly, a new IP license to a specified foreign entity on or after July 4, 2025, appears to confer “effective control” automatically and without regard to the actual terms of the license.

What Treasury has said so far

In February 2026, Treasury and the IRS issued Notice 2026-15. It is detailed on the material assistance rules, but it doesn’t provide guidance on “effective control.” The notice promises that proposed regulations are forthcoming and that these regulations will address “effective control.” Many in the market are also hoping to hear more about “effective control” in December, though Treasury has not yet provided an exact date on which the proposed regulations will be issued.

The FEOC restrictions separately direct Treasury to publish material assistance safe-harbor tables by late 2026. The development of those tables is worth watching, but they cover the material assistance rules, not “effective control.”

Industry groups have been pressing Treasury for guidance that provides clear, administrable standards for common ownership, licensing, service, warranty and operational arrangements. Based on our discussions with external tax and policy counsel who are actively engaged in these issues in Washington, we are cautiously optimistic that the eventual framework will be workable for the industry. Until Treasury provides more clarity, however, project owners and suppliers should evaluate their contracts under the statutory criteria and preserve flexibility to adjust their arrangements as the rules develop.

What’s still unclear

The statutory criteria of “effective control” don’t speak to every scenario. Effective control is a list of criteria, and the devil is in the details. Three questions stand out that will hopefully be addressed in forthcoming guidance:

Licensing scope: How far the licensing rule reaches.

Embedded IP: Whether IP embedded in an equipment contract presents an issue

Service and warranty rights: How exclusive service rights and warranties are treated. (Because the statute identifies exclusive maintenance rights, long-term service agreements (LTSA) and restrictive warranty arrangements are potentially a problem.)

What to watch for

Whether the guidance relies on existing industry standards and safe-harbor-style tables.

How “unrestricted” and “exclusive” are read for service and warranty rights.

How embedded IP is treated, and whether there is transition relief for existing contracts.

Five questions to ask now

As a taxpayer trying to navigate “effective control,” the following questions should be considered as starting points for a conversation with your counsel:

Who holds the right to maintain, repair and operate the system after commissioning, and is it exclusive?

Who controls access to operating and performance data?

How are warranty and OEM support structured, and do they limit who can service the system?

Does any license or IP right, including terms embedded in equipment or software contracts, involve a specified foreign entity?

Who is the U.S. counterparty you can call, and what do they contract for and flow down?

In our experience, the best way to reduce your risk is by including your preferred approach to each of these considerations in the agreement with your trusted project execution partner.

Where Synerex fits

We can’t promise how Treasury will ultimately define “effective control,” but owners still need access to bankable equipment and strong manufacturer support. Synerex combines proven OEM technology with our role as the customer’s U.S.-based execution partner, coordinating the relationships and responsibilities that support the project—including who controls system operations and data, who provides maintenance and support, and who serves as the accountable U.S. counterparty. If the final guidance differs from current expectations, our independent, U.S.-based model positions us to adapt. Owners should not have to choose between bankable technology, effective project execution and a thoughtful approach to regulatory risk. Synerex brings those pieces together.

What’s next

Guidance will keep evolving, and we’ll update this post as it does. If you’re working through FECO questions on a storage project, talk to our team.

This article is for general informational purposes only and does not constitute legal or tax advice. Project owners and developers should consult their legal and tax advisers regarding their specific circumstances.